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CHAPTER 2 : INTEREST RATE, CHARGED ON - Coggle Diagram
CHAPTER 2 : INTEREST RATE
INTEREST RATE
INTRODUCTION
AMOUNT CHARGED BY LENDER TO BORROWER FOR BORROWING A SUM OF MONEY EXPRESSED AS PERCENTAGE OF SUM BORROWED.
TO A LENDER - THE RETURN EARNED FOR PARTING WITH HIS FUNDS OVER A CERTAIN PERIOD OF TIME.
TO A BORROWER - THE PRICE TO PAY OVER A SPECIFIC PERIOD OF TIME.
NOMINAL RATES
RATES THAT A PERSON EARNS OR PAYS
REAL INTEREST RATES
AN INVESTOR'S RATE OF RETURN AFTER TAKING INTO CONSIDERATION THE INFLATION
FORMULA
REAL INTEREST RATE = (1+NR/1+IR) - 1
INTEREST AMOUNT = (PRINCIPAL x DAYS x RATE) / (365x100)
REAL INT RATE = NR - IR
FIXED RATES
ONLY ONE INTEREST RATE QUOTED THROUGH OUT THE LIFE OF THE LOAN
CAR LOAN, CREDIT CARDS OR OTHER HIRE PURCHASE.
VARIABLES RATES
RATES PEGGED AGAINST BLR, KLIBOR, OR MULTI-TIERED RATES.
PROTECT BOTH BORROWER AND LENDER AGAINST FLUCTUATIONS.
CHARGED ON
PROPERTY-BASED LENDING AND BUSINES LOANS.
REFERENCE RATES
OVERNIGHT POLICY RATE (OPR)
ROLE
AS A SIGNALING DEVICE TO INDICATE THE MONETORY POLICY STANCE
AS A TARGET RATE FOR THE DAY-TO-DAY LIQUIDITY OPERATIONS OF THE CENTRAL BANK.
SERVE AS THE PRIMARY REFERENCE RATE IN DETERMINING OTHER MARKET RATES.
BASED LENDING RATE (BLR)
RATE USED BY COMMERCIAL BANKS AND FINANCE COMPANIES AS A BASIS TO QUOTE FOR LENDING AND ADVANCES FACILITIES OFFERED TO CUSTOMERS.
BLR = OPR =/- BANK COST STRUCTURE
BASED ON OPR WHICH IN TURN IS BASED ON INTERBANK RATE.
BASED RATE
LENDING RATES = BASE RATE + SPECIFIC INTEREST RATE OF BORROWER.
DETERMINANTS OF INTEREST RATES
DEFAULT RISK
The risk that the issuer will not pay the interest and
principal on a timely basis
high default risk high the interest rate demanded by
investor to compensate for the risk exposure
LIQUIDITY RISK
The risk that the securities will be easily sold at the
expected price (without reduction in value)
Highly liquid assets carries lowest interest rates
REAL INTEREST RATES
The rate that would exist on a security without any
expected inflation over the holding period
It is the percentage change in the buying power of a
dollar
SPECIAL PROVISIONS
Special provisions or covenants in the contract of an
issuance of a security will effect interest rates;
examples callability, convertibility, taxability
INFLATION
Higher actual or expected inflation, higher will be the
level of interest rates.
TIME TO MATURITY
Refers to the length of time the security will mature
and this affect interest rates 🡪 the ‘term structure of interest rates’ or ‘yield curve’
The ‘maturity premium’ can be positive (an upward
sloping yield curve),negative (downward sloping
curve) or zero ( a flat yield curve)
The change in required interest rates as maturity
changes is called ‘maturity premium’
CHARGED ON